Quantitative Problem: Adams Manufacturing Inc. buys $12 million of materials (ne
ID: 2795533 • Letter: Q
Question
Quantitative Problem: Adams Manufacturing Inc. buys $12 million of materials (net of discounts) on terms of 2/10, net 50; and it currently pays after 10 days and takes the discounts. Adams plans to expand, which will require additional financing. If Adams decides to forgo discounts, how much additional credit could it obtain? Round your answer to the nearest cent. Do not round your intermediate calculations. Use 365dayin a year.
$______
What would be the nominal and effective cost of such a credit? Round your answer to 2 decimal places. Do not round intermediate calculations. Use 365 day in a year.
Nominal cost: %
Effective cost: %
Explanation / Answer
1)
Nominal cost = (Discount%/100-discount%) * 365 / (days taken - discount period)
= (2/98) * 365 / (50-10) = 18.62%
2)
Effective cost = [(1 + Discount%/100-discount%) ^ 365 / (days taken - discount period)] - 1
= [(1+2/98)^9.125] - 1
= 20.24%